AMG National Trust Bank’s (AMG) five-year economic and asset class performance projections provide the expected return information required for the formulation of a client’s efficient frontier. We have developed seven scenarios to illustrate different paths that the economy may take over a forward-looking five-year period.
Calculating Expected Total Return Estimates. Estimates of expected returns for the 19 asset classes used by AMG to develop clients strategic investment plans are provided for each economic scenario. AMG obtains these estimates for the aggregate of investment in each asset class, by using the following procedure:
- Identify key economic indicators, the most prominent of which are growth in real gross domestic product (GDP); consumer price inflation; long-term interest rates (10-year Treasury bond yields); short-term interest rates (90-day Treasury bill rates); oil prices; changes in the foreign-exchange value of the dollar (tradeweighted index).
- Develop projections for the numerical values of the various economic indicators that are consistent with each scenario.
- Assess the statistical relationships among key economic indicators, the economic scenarios and expected return estimates.
- Apply experience and judgment to analyze and adjust the foregoing results to determine the final expected return estimates.
Scenarios Development. It is AMG’s practice to construct several economic scenarios. We do so in order to project the most likely central tendencies of the various investment results under a number of future economic developments. Also, the multi-sample approach allows an examination of the likely effects of the prominent risks (both good and bad) on the course of the economy and investment returns. The risks examined are obtained by feedback from clients about their concerns, reviews of prominent financial and economic literature, and suggestions from AMG’s professional staff. Risks are ranked in terms of their relative importance and then woven into the scenarios.